Is an Early Mortgage Payoff Good or Bad?

by Amber Keefer

Retirement savings may make more sense than paying off your mortgage early.

While getting out from under mortgage debt early may seem like a blessing, it doesn’t always make sound financial sense for everyone. There are a number of factors to consider even if you’re in a position to pay off your mortgage loan sooner. Homeowners in their 20s and 30s often find it pays to channel extra money into other areas of investment while they have the opportunity and time.

Retirement Savings

Young homeowners who are still contributing to their retirement accounts may want to make retirement savings a priority for a while. Contributing to a retirement plan offers more tax benefits and the chance to earn higher returns on your money than what you’d save in the long run on the mortgage interest you pay. Forbes reporter Erick Carter suggests that you at least get your employer's full match on the contributions you make to your retirement plan at work before paying extra on your mortgage principal.

Mortgage Interest

When your mortgage loan is young and more of your monthly payment goes toward the interest, you can take a hefty tax deduction for the interest you pay on the loan. You might not want to pay off you mortgage early if your loan has a low interest rate and you itemize deductions and claim the interest you pay as a deductible expense on your federal tax return. However, Greg McBride, senior financial analyst at Bankrate, points out that once the balance of your mortgage loan is small enough that it no longer pays to take the tax deduction, paying off your mortgage early can give you substantially more money in your monthly household budget.

Emergency Savings

Another place to sink extra cash is into an emergency savings fund that you set aside for those unexpected rainy days. The money could come in handy for making your mortgage payments if you suddenly find yourself jobless or too sick to work. Keep your emergency savings liquid so that you can easily access the money when you need it. Although the general rule of thumb is to save enough money in an emergency fund to cover at least six months of living expenses, you might want to save enough to carry you 12 months or more, advises Bankrate's Sheyna Steiner.

High-Interest Debt

If you have high-interest credit card debt, paying off those accounts may make more sense than working to pay off your mortgage early. Since you’re probably paying a much higher interest rate on your credit card accounts than your mortgage loan, you might want to concentrate on eliminating that debt first. This can be a smart financial move, especially if you’re still at the stage in your mortgage where you can benefit from the tax deduction. With the average interest rates on mortgage loans near record lows, carrying credit card debt that comes at a much higher interest rate costs you more money in interest, reports Forbes.com.

Investing

If you’re not afraid to take risks, investing your money in stocks and bonds can potentially earn far higher rates of return over the long term than the amount of interest you pay on your mortgage loan. In the past, stocks and securities have earned average returns of about 10 percent a year, reports HSH.com, a national source of consumer loan information. When you’re younger, you have more time to invest money in the stock market and give it time to grow. At the very least, many savings and investment accounts pay compound interest, which means you earn interest on interest.

About the Author

Amber Keefer has more than 25 years of experience working in the fields of human services and health care administration. Writing professionally since 1997, she has written articles covering business and finance, health, fitness, parenting and senior living issues for both print and online publications. Keefer holds a B.A. from Bloomsburg University of Pennsylvania and an M.B.A. in health care management from Baker College.